9.5 AVOIDANCE OR SUBORDINATION OF LIENS IN BANKRUPTCY
9.501 Preferences.
A. Avoidable Transfers. Section 547(b) of the Bankruptcy Code provides that:
the trustee may avoid any transfer of an interest of the debtor in property—
| (1) | to or for the benefit of a creditor; | ||
| (2) | for or on account of an antecedent debt owed by the debtor before the transfer was made; | ||
| (3) | made while the debtor was insolvent; | ||
| (4) | made— | ||
| (A) | on or within 90 days before the date of the filing of the bankruptcy petition; or | ||
| (B) | between 90 days and one year before the date of the filing of such petition, if such creditor at the time of the transfer was an insider; and | ||
| (5) | that enables such creditor to receive more than such creditor would receive if— | ||
| (A) | the case were a case under Chapter 7 of this title; | ||
| (B) | the transfer had not been made; and | ||
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| (C) | such creditor received payment of such debt to the extent provided by the provisions of this title. 253 |
B. "Transfer" Defined. "Transfer" means the creation of a lien; the retention of title as a security interest; the foreclosure of a debtor's equity of redemption; or each mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property or an interest in property. 254
C. "Insolvent" Defined. The debtor is presumed to have been insolvent during the 90-day period before the filing of the bankruptcy petition. 255 "Insolvent" is defined in section 101(32) of the Code and is computed on a balance sheet basis.
D. Computing the 90-Day Period. One fertile area for preference litigation is the determination of whether a particular transfer took place within the 90-day preference period. For example, the Supreme Court has ruled that a payment (transfer) made by a check is deemed to occur on the date the bank honors the check, not on the date the check is presented to the payee. 256 This decision is contrary to the Fourth Circuit's prior opinion on this issue. 257 In addition, the Third Circuit ruled, in In re Nelson Co., 258 that the 90-day preference period of section 547(b) is calculated by counting back from the date of the bankruptcy filing. This is in direct opposition to the case law in Virginia, where the calculation is made by counting forward and including the petition date in the preference period. 259
E. Date When the Lien Was Obtained. The question of when the lien was obtained is critical to the calculation of the preference period.
1. Real Estate. A lien on real estate is obtained on the date of recordation. A judgment does not become a lien on real estate until it has been docketed in the county or city where the real estate is located. 260 An
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attachment does not become a lien on real estate until the memorandum of attachment has been recorded. 261
2. Personal Property.
a. Consensual Lien. The effective date of a consensual lien is the date on which it becomes so far perfected that no subsequent lien upon the property obtainable by legal or equitable proceedings on a simple contract could become superior to the rights of the transferee. Usually this is the date the security interest is perfected by the filing of a financing statement. 262
b. Judgment Lien. The effective date of a judgment lien on personal property is a bit more difficult to measure. The writ of fieri facias creates a lien on the property of the judgment debtor capable of being levied on from the time it is actually levied by the officer to whom it has been delivered for execution, 263 and it ceases after a reasonable time for advertisement and sale. 264
c. Intangible Personal Property. On intangible personal property, the lien of fieri facias commences at the time the writ of fieri facias is delivered to a sheriff or other officer to be executed 265 and ceases one year from the return date or, if the intangible property is a debt due from or a claim upon a third person in favor of the judgment debtor, then one year from the final determination of the amount owed the judgment debtor. 266
d. Tangible Personal Property. For bankruptcy purposes, the Virginia execution lien on tangible personal property is perfected when the writ of fieri facias is levied and on intangible personal property when the writ of fieri facias is delivered to the officer to be executed. 267 However, in the case of wages, there is no transfer of property
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until the debtor has rights in the property. Because the debtor does not have an interest in wages until they are earned, any wages earned and garnished during the 90 days before bankruptcy are preferential transfers even though execution was issued more than 90 days before bankruptcy. 268
3. Examples. A garnishment proceeding presents an excellent illustration of the foregoing.
| A. | A creditor obtains a judgment and has an execution and a summons in garnishment issued more than 90 days before bankruptcy. The garnishment is returnable within 90 days before bankruptcy. The garnishment is valid in this example, and money recovered may not be avoided as a preference since the lien was obtained upon the issuance of the execution, the fieri facias, which was more than 90 days before bankruptcy. However, if the garnishment is against wages, those wages earned within 90 days before bankruptcy could be recovered as a preference. | |
| B. | A creditor obtains a judgment and has an execution issued more than 90 days before bankruptcy. A summons in garnishment is issued and made returnable within 90 days before bankruptcy. The garnishment in this case is valid for the same reasons set forth in subparagraph A unless it is a garnishment of wages, in which case it would be voidable in its entirety. | |
| C. | A creditor obtains a judgment and has an execution issued within 90 days of bankruptcy. A summons in garnishment is issued and returnable within 90 days before bankruptcy. Here the garnishment would be voidable as a preference, whether against wages or other property, because the lien became effective within 90 days of bankruptcy. |
To the extent that a judicial lien impairs an exemption, a lien may be avoided under section 522(f) of the Code. Thus, if the funds garnished in the examples above were claimed as exempt, the debtor could invalidate the fieri facias lien and defeat the garnishment.
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F. Insider Preferences. The Bankruptcy Code defines an "insider" as a director of the debtor corporation, an officer of the debtor, a person in control of the debtor, a partnership in which the debtor is a general partner, a general partner of the debtor, or a relative of a general partner, director, officer, or person in control of the debtor. 269 In 1989 the Seventh Circuit raised concerns about payments by debtors to third parties that incidentally benefit insiders, 270 and applied a one-year period within which a trustee could avoid such payments. The court further empowered the trustee to sue either the creditor or the insider under section 550 to recover the transferred value. 271
The In re Deprizio opinion became very controversial over time, 272 and the Bankruptcy Code has since put its concerns to bed. First, in 1994 Congress added section 550(c), which provides that a trustee may not recover the value of an avoided transfer from a non-insider creditor. Then, in 2005 BAPCPA inserted section 547(i), which clarifies that a trustee may only avoid a transfer made to a non-insider creditor that benefits an insider creditor "with respect to the creditor that is an insider." 273
G. Nonavoidable Transfers. Code section 547(c) enumerates certain transfers that are not avoidable as preferences. These include:
| 1. | Transactions intended to be contemporaneous exchanges for new value that were in fact substantially contemporaneous exchanges; | |
| 2. | Payments of debts incurred in the debtor's ordinary course of business where those transfers were made either (a) in the debtor's ordinary course of business, or (b) according to ordinary business terms. The Supreme Court has held that payments on long-term debt may fall under the "ordinary course" exception to the preference statute; 274 |
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| 3. | Transactions that create a security interest in property acquired by the debtor where the security interest secures new value given to enable the debtor to acquire the secured property and where the security interest is perfected within 30 days after the debtor receives possession of the property; | |
| 4. | A transfer of an interest in property where, after the transfer occurred, the creditor gave new value to or for the benefit of the debtor; 275 | |
| 5. | With respect to a creditor with a security interest in inventory or accounts, the acquisition of new accounts or inventory. This acquisition is subject to preference attack only to the extent that the creditor's position during the 90-day period before bankruptcy is improved or, in the event the creditor is an insider, during the period of one year before the filing of the petition, but only to the extent that such improvement is detrimental to the estate; | |
| 6. | The fixing of a statutory lien that is not avoidable under section 545. Section 545 provides that the trustee may avoid the fixing of a statutory lien on the debtor's property to the extent the lien: (i) becomes effective upon the filing of a bankruptcy petition; (ii) is not perfected or enforceable on the date of the filing of the petition against a bona fide purchaser who purchases such property on the date of the filing of the petition, whether or not such purchaser exists; (iii) is for rent; or (iv) is a lien of distress for rent; | |
| 7. | Bona fide payments for domestic support; | |
| 8. | A transfer of property by an individual consumer debtor where the aggregate value of all property that constitutes the transfer is less than $600; | |
| 9. | In a case filed by a debtor whose debts are not primarily consumer debts, transfers in which the aggregate value |
